Mahindra Logistics stock: Shift to organised segment should boost revenues

The stock of Mahindra Logistics was up 9 per cent over last month on expectations of higher growth aided by a shift to the organised segment, increasing share of non-Mahindra business and better margins.
 
The non-M&M business (46 per cent of revenue) is expected to grow at 25-30 per cent annually, while the M&M business (54 per cent) should grow at 10-12 per cent over the next three years.
 
Given the strong growth in auto and tractor sales (volumes up about 12 per cent year-to-date), the company has seen a good traction from the supply chain management business of its parent Mahindra & Mahindra (M&M). The non-M&M business has been aided by increasing wallet share of existing customers and a gradual shift towards organised players in the logistics space.
 
The company is looking at servicing multiple plant locations of existing clients and expanding its footprint in e-commerce through new customer acquisitions.
 
Analysts at Kotak Institutional Equities said the company’s focus on deepening working relationships with clients and business associates would help it to outperform the fast-growing third-party logistics market.
 
Significant opportunity exists for the company to penetrate the passenger transport segment, dominated by unorganised players.

Mahindra Logistics is aiming at increasing its gross margins, which are at 7.7 per cent, by improving its revenue mix as well as the share of warehousing compared to transportation which is less profitable. The company could shed low margin accounts as the revenue share of the non-parent business crosses the half-line mark.
 
The working capital situation can improve in FY19 on the back of tax refunds and reduction in tax deducted at source from 2 per cent to 0.5 per cent.
 
Analysts at Spark Capital expect the company’s margins to increase as the share of value-added services typically sees an inflection point after three years of a client relationship.
 
Given the growth prospects in the logistics space and improvement in profitability, analysts said the company would register strong profit growth of over 30 per cent in the next couple of years.
 
The stock is trading at 30 times its FY20 earnings estimates. Accumulate on dips.